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Research Points to Two-Pronged Diversification

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GREENWICH, Ct (–In the hunt for opportunities in an increasingly crowded space, hedge fund managers are seeking to broaden both their strategic and their geographical options according to recent research by financial services consulting firm Greenwich Associates in conjunction with Global Custodian magazine. The research was based on the responses provided by 1,227 hedge funds to questions concerning geographical and strategic asset allocation trends.

“Over the last 18 months, many hedge funds have been looking to enter emerging markets and exploit both their outperformance with respect to developed markets and the inefficiencies that still exist in emerging marketplaces,” Greenwich Associates principal John Feng told HedgeWorld in an interview. “They have also sought to increase their exposure to the Japanese revival.”

The research finds that European hedge funds are leading the way when it comes to adopting a global approach, with London-domiciled funds heading up the charge into emerging markets. Statistically, 54% of European funds invest in the US, 48% in Japan and 38% in Asia ex-Japan. A quarter of them also invest in Central and Eastern Europe, 16% in Latin America and 15% in South Africa.

North American funds are also participating in the geographical allocation shift, although at a slower pace than the Europeans. While only 35% of them invest in Western Europe, 28% now invest in Japan, 28% in Asia ex-Japan, 17% in Central and Eastern Europe and just over 10% in Latin America.

The research also notes that the large multi-strategy funds with over $1 billion in assets are faster to move into new markets than smaller ones, regardless of where the funds are domiciled.

The number of multi-strategy strategy funds is also on the rise. Of 854 funds surveyed in 2005, 53% described themselves as single-strategy funds, while the remaining 47% said they were multi-strategy. The numbers are inverted for the 1,227 funds responding to this year’s survey, with 53% of them calling themselves multi-strategy funds.

Much of the diversification trend is being driven by institutional investors looking to limit their risks to specific strategies and locations, while also becoming more sophisticated in their methods of doing so. “Historically institutions such as pension funds which wanted multiple strategies invested in funds of funds,” says Mr. Feng. “Now the bigger institutional funds are looking for strategic diversification from single managers.”

The trend was marked in the US and in Europe, with the proportion of multi-strategy funds rising from 44% to 52% in the US, and from 55% to 62% in Europe. Asian funds bucked the trend with the proportion of multi-strategy funds sliding from 53% to 44%, although these funds represented only 4% of the sample in the 2005 survey and less than 6% this year.

So are single strategy funds which specialize in specific markets on the way out. Not necessarily, according to Mr. Feng, although investors in this type of fund will need a healthy appetite for risk. “Single strategy funds working in a niche area can still make money, but this is a risky road to take,” he says. “If you consider the difficulties encountered by convertible arbitrage strategies over the last couple of years, the lesson is there for all to see.”

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Contact Bob Keane with questions or comments at [email protected].


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